Economy shrinks

Even worse days may be ahead as GDP contracts

Kevin G. HallMcClatchy Newspapers

Published Saturday, January 31, 2009

WASHINGTON -- The U.S. economy contracted 3.8 percent in the final three months of last year -- the biggest such shrinkage in almost 27 years -- as a deepening recession gripped the nation, the government reported Friday.

As bad as that number was, mainstream economists had been expecting a much bigger contraction, and Wall Street cheered. All three stock indices opened in positive territory in early trading after two days of steep losses.

That cheer may be short-lived, as there are numerous signs -- including some in the Commerce Department's report Friday on the gross domestic product -- that suggest that the nation's economic conditions are deteriorating further and faster.

"Although the decline in GDP was the largest contraction since the first quarter of 1982, the outturn was not nearly as bad as the 5.5 percent plunge that the market consensus forecast had anticipated," Jay Bryson, a global economist with the Charlotte, N.C.-based national bank Wachovia, wrote in a note to investors. "Is it time to break out the champagne and start celebrating the incipient economic recovery? Hardly."

Although Friday's report showed a contraction, the growth numbers were padded by a buildup of inventory at businesses. This number was down $30 billion from July through September, but turned positive by more than $6 billion in the fourth quarter.

It means this: Goods that built up on store shelves and warehouses, because customers are effectively on a buyer's strike, are counted toward growth. They masked a deeper decline in economic activity. When inventories are subtracted from the equation, the contraction in growth was 5.1 percent, the low end of the dismal range that economists had expected.

"The increase in inventories means that growth in the current quarter will be worse than previously expected; probably closer to negative 5 percent. The worst of the downturn wasn't in our past, it is in our future," said Mark Zandi, chief economist for forecaster Moody's Economy.com in West Chester, Pa.

The fourth quarter declines follow a 0.5 percent contraction in the third quarter of 2008. The National Bureau of Economic Research has said that the U.S. economy entered a recession in December 2007.

In a statement, the chairman of the White House Council of Economic Advisers, Christina Romer, said that the even-larger contraction when inventory buildup was subtracted pointed to a recession that was worsening.

"The large decline confirms the evidence from other indicators, such as payroll employment and the unemployment rate, that the U.S. economy continues to contract severely," she said. "Aggressive, well-designed fiscal stimulus is critical to reversing this severe decline and putting the economy on the road to recovery and improved long-run growth."

The House of Representatives has passed an economic stimulus bill that's worth more than $819 billion, and the Senate begins voting on its version next week. Congressional leaders in both parties have promised to send a stimulus bill to President Barack Obama by mid-February.

Other signs of further trouble were deeper in the GDP data released Friday.

"The decline in motor vehicle output was particularly severe, accounting for 2.0 percentage points of the overall fall in GDP of 3.8 percent. This widespread decline emphasizes that the problems that began in our housing and financial sector have spread to nearly all areas of the economy," Romer said. "Immediate action to support both the financial sector and overall demand is essential."

Also deep in the data was a sign of how the rising tide of global trade is receding in a global slowdown, dampening what had been one of the few bright spots last year in a sagging economy.

"As if to rub salt in the wound, gross exports plunged nearly 20 percent, a byproduct of recession in most foreign countries," Bryson, of Wachovia, said in his research note.

It's hard to see any light at the end of the tunnel. This week brought more than 80,000 job cuts announced at major U.S. corporations such as Home Depot, Microsoft, Caterpillar and other brand-name companies. The Labor Department reported Thursday that more than 4.7 million Americans have drawn jobless benefits for a week or longer, the highest amount since such recordkeeping began in 1967.

Another 588,000 Americans sought first-time jobless benefits for the week that ended Jan. 17, suggesting that January's job losses probably will exceed half a million for the fourth consecutive month.